Just a little blog about me and mine.

Credit Card Rewards September 17, 2009

Rachel asked me about my thoughts on Credit Card Rewards programs, and my comment in response got increasingly longer, so it made more sense to make it even longer still and turn it into an actual blog post.

Why I Use a Credit Card for Daily Expenses
I will never advocate that anyone carry credit card debt, and I can see that for some people the benefit of rewards from a credit card can justify or excuse excessive spending. Even the best rewards cards don’t pay much more than 2% back to you, so that’s the first perspective to start with. For me, it’s easier to pay with a credit card for most daily expenses (don’t you just get angry at those little old ladies who try to pay with checks at the grocery store?). I prefer an actual credit card to my debit card which are equally convenient but the balance has to be watched even more closely since sometimes deposits and withdrawals can easily cross paths and be poorly timed. That’s a nice way of saying I’ve had deposits not clear even though they should have, while payments cleared way sooner than they should have and bounced a virtual check and got hit with a fee, even though I wasn’t actually overspending. I know that cash based budgets or even keeping a closer eye on actual spending via a debit card can be very useful budgeting tools, but I just find it easier to use plastic at a store. I’m actually not a very wise spender of cash, I also lose it sometimes, and I don’t feel comfortable carrying lots of cash. I also don’t carry a purse, just a metal card case wallet which I then rubber band cash to when I have it (except for now, as PL noticed last night, my rubber band broke a few weeks ago and I can’t remember to find a new one, so cash is just hanging out loose in the non-closed up pocket of my work bag waiting to get pulled out and lost by accident), so those are more personal reasons why I like prefer credit cards for daily spending.

What Card(s) Do I Use?
For the past year or so we’ve used the Kroger Rewards Mastercard for most daily expenses. So probably $500-$600 a month spent on groceries, gas, random shopping etc… that we then pay off. That’s been my only experience with reward cards up to now.

This card has a $1500 limit so it’s great for daily expenses without worrying about reaching that limit, but if there is an occasion where we’d have to travel unexpectedly or otherwise need to quickly access more money than we have on hand in an emergency fund quickly, a credit card is the easiest thing to use in that case and we could easily go over the limit on this card. For situations like that, and for times where we had a big purchase like a freezer or washer and dryer, it was easier to use a credit card we have with a much higher limit at the store and pay the full amount later-knowing that we could afford the purchase we were making, of course. That high limit card has been nice for times like that, but it had no rewards at all.

For that reason, when I recently learned about the new Invest First Credit Card with Charles Schwab which rewards you with an unlimited 2% cash back deposited in your brokerage account, I signed up. I already had a Charles Schwab brokerage account, and find them great to work with. For instance, when I was 21 I inherited some money and needed to open an investment account to put it in. I had a great deal of trouble getting anyone at Fidelity to help me and explain things to me since I knew nothing about investing, but the very first person I talked to at Charles Schwab invited me to come in and talk through my options and get some good investing advice for the future (it didn’t matter to them how little or how much money I had, or how young or old I was). When we decided to buy a house, we went first to Charles Schwab, asked for a gay friendly staffer, and we sat down with him (in person!) and he was wonderful in walking us through applying for our first mortgage, and gave us some good general financial advice as well without any fees for doing so. I think the timing of the introduction of this new card is good since while Americans certainly don’t need any more credit cards, there is a renewed interest in savings and investing money and a brokerage account potentially gets you greater return that sticking the money in a savings account.

What’s the Reward?

From the Kroger rewards card, we seem to receive $20 off every quarter (in the form of check-like coupons that you just hand to the cashier and cash in easily). They claim you get $5 off for each 1000 points you earn, and you get a point for each dollar spent anywhere, 2 points for each dollar at Kroger and 3 points on Kroger brand products. That’s really only $80 a year cash back, which is nice but doesn’t drastically make a difference in our budget.

The real reason I like this reward credit card though is accumulating points for gasoline discounts (and the Kroger gas station is conveniently located not too far from home at the store we prefer). With a regular Kroger shopper card you get 3 cents off a gallon, and 10 cents off for every $100 you spend. With the credit card we get 15 cents off with that $100, and prescriptions also add to the benefit of getting the 15 cents. (I believe for every 2 prescriptions you fill there you get the 10 cent, or in our case 15 cent, gas discount…and PL has 3-4 prescriptions a month to fill). Because of this, we have found that we always end up with the 15 cents benefit which, if my very quick math is right, is probably about $150 saved per year on gas at the rate we fill up. If you’re Kroger isn’t nice, or if it’s not convenient, it’s certainly not worth going out of your way just for these rewards.

With the new Charles Schwab card, I expect that we’ll shift some expenses to that, while right now planning to keep Kroger-based spending on the Kroger card since the gas benefit does seem to help out. Confusing, no? This new card is also a Visa Signature card, which according to their commercials anyway, has some other perks that I need to check out. So, my best guess for now is that with regular spending we’ll get $100-$200 cash back this year just from daily spending deposited in the brokerage account, maybe more if we take any trips. That’s still not a ton of money (and again, not at all something you can justify spending more to get) but it’s a competitive credit card reward rate and it goes straight into an investment account where it can earn more over time through wise investing and compound interest.

How?

I own some shares of a mutual fund (SWPPX) that consists of the same stocks as the S&P 500, so I’ll use that as an example. That fund currently costs $16.76 a share (it used to cost more than that, but this has been a rough year), so with $200 (which I didn’t do anything to earn other than buy the things I was going to buy anyway), I can buy almost 12 shares of that mutual fund. So if I bought those 12 shares yesterday, today that fund went up .25 a share. That’s $3 I earned today while sitting on my butt blogging at work. Not bad. That fund also pays a .39 dividend (a way the company shares the profits) per share annually, so that would be another $4.68 I didn’t do anything to earn. I reinvest all of my stock/mutual fund dividends right now, so that’s even more shares that I can buy, and then when the prices goes up or dividends are calculated, I’m starting with more shares than before. This is off topic from reward credit cards, but does explain why I think the reward from the Invest First Charles Schwab card is worth it.

Other Reward Cards

While these are the only reward cards I’ve personally had experience with, reward cards with airlines or hotels are much more common. Many of these programs charge an annual fee to join, and I simply don’t spend enough money, and in particular, don’t spend enough money on plane tickets or hotels to recover that fee each year through the benefits received. We’ve probably all heard about the Capital One no hassle rewards,card, and I looked that card up and it has no annual fee, and gives you 1 frequent flyer mile for every $1 spent up to $1000 spent per month, and 2 miles $2 after that. It takes 25,000 or so Delta frequent flyer miles for a free ticket, so that doesn’t seem very rewarding to me…at least not at the rate I spend money. For cash back cards, I see 1-2% as the average at http://www.creditcards.com/ and some Discover cards pay up to 5% for certain types of purchases, but many places do not take Discover.

So I would conclude that it can be beneficial to use a rewards card, but to find one that will get you a reward you can actually obtain and use. The main thing though is remembering that you aren’t really making enough back to justify greater spending. The credit card companies wouldn’t offer reward cards if they didn’t earn more from it than they give to their customers.